AED - United Arab Emirates Dirham

The history of the United Arab Emirates dirham

The word dirham is borrowed from the Greek word drakhmé, and it has been there for centuries, even through the Ottoman Empire.

Before the year of 1966, UAE used the Gulf rupee, which was pegged at parity to the Indian rupee. As India decided to devalue the Gulf rupee on 6 June 1966, several of the states in the UAE adopted their own or other currencies. Apart from Abu Dhabi, which used the Bahraini dina, all the Trucial States briefly adopted the Saudi riyal and then changed to the Qatar and Dubai riyal. Finally, the UAE adopted the dirham as its currency in 1973. Abu Dhabi also changed from its former currency of dinah Bahrain to the United Arab Emirates dirham, with 1 dinar equals 10 dirhams.

Currently, UAE used both banknotes and coins in denominations of:

• Coins: 25 fils, 50 fils, and Dh1

• Banknotes: Dhs5, Dhs10, Dhs20, Dhs50, Dhs100, Dhs200, Dhs500, Dhs1000

Position of Emirati dirham in global finance

The United Arab Emirates dirham (AED) holds a significant position to the economy of the country itself, as well as to the regional and global finance. The dirham is not only used within the country, but also accepted in few other countries of the Gulf. Thanks to the country’s well-performing economy and rich oil reserves, this currency is currently maintaining a high standing among other nations in the world.

As the official currency of the UAE, the AED has maintained a stable exchange rate with the US dollar since its introduction in 1973, contributing to the country’s economy, enhancing foreign investments, and supporting developments in various fields, namely oil exports, commerce, tourism, and finance services. 

Although the AED is not a primary global reserve currency, it still plays an important role in oil transactions and serves as a bridge for financial activities between Western countries and the Middle East.

UAE Dirham coins

United Arab Emirates dirham coins were introduced in 1973 with denominations of 1, 5, 10, 25, and 50 fils and 1 dirham. For the observe of each coin, there often has a larger-scale image representing significant symbols of the United Arab Emirates, and the reserve is inscribed with the value and numbers are inscribed in Eastern Arabic numerals, and the text is Arabic.

While the rarely used 1, 5, and 10 fils are made of bronze, the higher denominations are in cupronickel. These coins share the same size and composition with the Qatar and Dubai dirham coins, featuring distinctive designs that reflect the culture and symbols of the UAE.

Since 1976, the Central Bank of the United Arab Emirates has issued several commemorative coins in denominations of 1, 5, 25, 50, 100, 500, 750, and 1000 dirhams.

United Arab Emirates dirham banknotes

The banknotes of the United Arab Emirates (UAE) come in denominations of 5 Dhs (brown), 10 Dhs (green), 20 Dhs (light blue), 50 Dhs (purple), 100 Dhs (pink), 200 Dhs (green/brown), 500 Dhs (blue), and 1,000 Dhs (light green). Issued by the UAE Central Bank, these banknotes feature distinct designs that reflect the nation's culture and history.

The observe side of the banknotes is written in Arabic with Eastern Arabic numerals, while the reverse side uses English with Western numerals. AED banknotes incorporate several security features, including watermarks, barcodes, and intricate patterns to prevent counterfeiting. 

After the two series of Dirham banknotes in 1973 and 1982 with the 500 dirhams as of the highest value, the Central Bank of the UAE introduced higher denomination banknotes, including the 1000 dirhams and 200 dirhams note as a result of the growing economy and increasing needs of the UAE’s financial system.

As an act of security enhancement, the UAE has upgraded its banknotes with features like holograms and UV ink in recent years. The introduction of polymer notes began in 2018 with the 100 dirham banknote, known for its durability and environmental benefits. By 2021, the UAE further modernized its currency by releasing polymer 50 dirham notes to commemorate its 50th anniversary, indicating a shift toward using polymer for future banknotes.

Factors Influencing the currency value of AED

The value of the United Arab Emirates dirham (AED) is influenced by various factors, including:

• Global Oil Prices: As one of the major oil exporters, UAE's economy and the value of the AED are strongly affected by global oil prices.

• World Economic Situation and Prospects: The growth of vital economic sectors, especially oil, tourism, and finance, has a direct effect on the value of the AED. Furthermore, elevated inflation rates can diminish the currency's purchasing power, thereby affecting the dirham's value.

• Monetary Policy: The interest rates established by the UAE Central Bank can impact the value of the currency. Generally, higher interest rates tend to attract investors, leading to an appreciation of the AED. Additionally, monetary supply policies can influence both inflation and the value of the dirham.

• International Trade: The UAE has an open economy, so the export and import of goods influence the value of the AED. A trade surplus can enhance the currency's value.

• Exchange Rates: Fluctuations in the exchange rate between the AED and other currencies also affect its value.

• Political Factors: Political stability both regionally and globally plays a crucial role in shaping investor confidence, which subsequently impacts the value of the AED. Additionally, government policy choices and international trade agreements also have an impact on the currency's value.

• Investment Demand: If the AED is perceived as a stable and safe currency, demand for it will increase, thereby boosting its value. Psychological factors, including trust in the economy and government, also play a role in determining the value of the AED.

• Global Gold Prices (XAU/USD): Gold prices greatly influence countries' monetary policies. If gold prices increase and cause the UAE dirham to appreciate significantly, the UAE Central Bank may intervene to prevent excessive exchange rate rises, thereby protecting the competitive edge of UAE exporters.

In conclusion, the value of the United Arab Emirates dirham is shaped by a multitude of interconnected factors as mentioned above. As the UAE continues to evolve as a major player in the global economy, monitoring these factors will be essential for predicting future trends in the dirham's value and ensuring its sustainable stability and growth.